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 Ratings agency India Ratings and Research has maintained a negative outlook on the power sector for FY22, on account of a further weakening in the financial position of distribution companies due to Covid-19 led business disruptions.

According to the ratings agency, the discoms relief package of Rs 1.25 trillion was expected to reduce the overall discoms dues, however, lower-than-expected disbursements under the package along with the discoms' further weakened profile due to Covid-19 had led to a continuous build-up of dues by end-December 2020.

"Moreover, the inability of the states to avail tranche-2 of the package may keep the outstanding dues high for a long period," the ratings agency said in a statement.

"The tranche-2 disbursements are dependent on the implementation of undertakings given at the time of sanction and disbursement of tranche-1 such as smart meters installation in government departments, liquidation plan for clearing of dues by state governments towards unpaid electricity dues and subsidy amount to discoms."

As per the agency, the power demand however has started improving post opening-up of the economy from September 2020 which is expected to lower the build-up of current dues by discoms in FY22.

"Ind-Ra expects the power demand to grow at 9-10 per cent YoY in FY22, and hence the thermal plant load factors would recover. However, the recovery to above 60 per cent would be beyond FY23, given the continued thermal capacity additions of 6-8 GW."

Furthermore, the share of renewable and nuclear power in the overall generation is expected to increase with planned capacity additions, further impacting the thermal plant load factors.

"The renewable capacity additions are also driven by growing priority of ESG (environmental, social and governance) investments among global investors."

"Ind-Ra believes the announcements by the Ministry of Power, including the privatisation of discoms in the union territories and bringing in competition to existing discoms, would lead to higher private sector participation in discoms."

However, strong protests by employee unions as was seen in Uttar Pradesh along with the suspension of tender process for the privatisation of power distribution companies in the union territories of Dadra & Nagar Haveli and Daman & Diu may delay the process again.

"The key states such as Tamil Nadu, Uttar Pradesh, Rajasthan continue to report high aggregate technical and commercial losses."

In addition, the agency cited that Covid-19 led disruptions and uncertainty on power demand, the resolution of stressed thermal assets have come to almost standstill in FY21.

"The assets, which got bids pre Covid-19, could not be resolved in FY21 since players withdrew bids on account of the uncertainty due to Covid-19."

"However, since the power prices at exchange firmed up again in February 2021, Ind-Ra believes the resolution process will start again and could lead to the resolution of few assets during FY22."